Deschutes 401(k) Advisor
Sensible Solutions for Retirement Planning

1Q 2001

Is your 401(k) down?
Put stock market volatility into perspective
Has the downward spiral of the market over the past year left you dazed and confused about what to do with your 401(k) investments? Have you resisted the urge to stampede from your stock funds?

Perspective...
As the stock market’s most volatile year since the short bear market in 1987, the year 2000 (and so far in 2001) has been disquieting to all but the most experienced investors. What these enlightened (and wise) investors know is that we’ve been here before, we’ll be here again, and these temporary market downturns provide us with outstanding opportunities to invest.

Market declines are natural
The chart below shows the number of declines in the Dow Jones Industrial Average since 1900 and how long they have lasted on average.
As you can see, there have been 26 bear markets since 1900 with an average length of around 5 months. These declines have occurred for a variety of reasons including economic growth (or lack of), interest rates, and political turmoil.

Our current market volatility is also occuring for a combination of factors including a troubled technology sector, weak corporate earnings, and fears of recession. While these conditions can seem very troubling to the average investor, they are a matter of course in a healthy economy. Technology has experienced volatility before and the stock market has recovered. The economy has experienced 5 recessions in the last 30 years and the stock market has recovered and prospered after each one.

What can you do?
It’s best not to panic. Keep in mind that saving for retirement is a long-term objective for most of us. The reality is that, over time, stocks will outperform other asset classes and are an important part of a well-diversified portfolio.

Since 1925, large cap stocks have returned an average annual return of 11.3%, compared with bonds 5.1%, and treasury bills 3.8%. What this tells us is that even when considering all market declines during this time period, stocks still came out ahead.

Stock market fluctuations are a normal and necessary part of the equation for long-term investing. Reevaluate your risk tolerance see (Spreading Your Risk) to make sure you are investing appropriately and you can still stay on track for retirement even during volatile times.

A Silver Lining
How to make a market downturn your friend

“Steady as she goes”
Hopefully we have convinced you to keep investing in the stock market (see Is Your 401(k) Down? page 1). Investing in a 401(k) plan is the perfect way to do it. Making steady, consistent deferrals through a 401(k) plan takes the worry out of “when to buy”. If timing the market were easy, we would all be millionaires. In actuality, market timing is risky at best. There is, however, a proven strategy for withstanding and profiting from market volatility. The strategy is called dollar cost averaging.

Dollar cost averaging is simply investing the same amount of money in the same investment at regular intervals. Although, dollar cost averaging won’t guarantee you a gain or prevent a loss, it will ensure that you buy more shares when share prices are low, and fewer shares when share prices are high.

The result of dollar cost averaging will be a lower average cost per share, meaning you get more shares for your investment dollars (see Buy Low, Sell High below), ultimately allowing for a greater potential return. This strategy will be particularly effective in a volatile market where falling stock prices can be exploited to the greatest degree.

What can you do now?
1. Look at a market decline as a buying opportunity. If it weren’t for market corrections, we would always buy “high”.

2. Focus on your portfolio’s overall performance rather than the returns of individual funds or asset classes. If you are well-diversified, you should always have investments in your portfolio that are both over and under-performing.

3. Develop an investment strategy and stick with it. Read “Spreading Your Risk” on how to develop your optimal asset allocation strategy.

4. Diversification is key. In fact, being well diversified tends to minimize losses. Read on for our current recommendations or visit www.deschutes401k.com to use our on-line risk questionnaire.

The silver lining...
What we must remember, even during difficult times, is that higher long term returns await the goal-oriented investor with the perseverance to weather the storm.

“It’s time and not timing” that wins the retirement investing game.

Spreading your risk
Diversification remains key

While it is wise to maintain your long-term strategy during volatile markets, your first step should be to make sure you are adhering to the investing approach most appropriate for you.

Asset allocation is simply spreading your risk among different types of investments. Seeing the NASDAQ down over 60% from its all-time high last year has been a harsh reminder for investors not to put all their eggs in one basket.

1. Start by spreading your risk among different kinds of assets, i.e., stock, bonds, and cash. Asset classes often respond differently to the same market conditions. Diversification can help protect you from being too dependent on any one market.

2. Diversify the assets you have in stocks by investing in different types of stock funds. Most 401(k) plans offer both International and US Stocks, and large company and small company stocks with differing management styles.

3. Utilize the tools provided by Deschutes Investment Advisors to determine your best strategy. Utilize our on-line risk assessment questionnaire or request a Deschutes Savings Workbook from your company benefits department.

4. Maintain your strategy no matter what happens in the stock market. Your investment strategy should only be altered if something changes in your overall financial goals. If you have the appropriate long-term strategy, short-term fluctuations in the market won’t matter as much.

The models below are our current recommendations for short-term/conservative, moderate, and long-term/agressive investors.

Short-Term Strategy (0-3 years until retirement)	Moderate Strategy (3-10 years until retirement)	Long-Term Strategy (10+ years until retirement)

The Deschutes 401(k) Advisor is a quarterly publication educating 401(k) plan participants on the current issues related to retirement planning and investing.

Deschutes Investment Advisors is an independent firm dedicated to developing optimal strategies for corporate retirement plans, endownment and foundations, and individual investors. We can be reached at 503.223.2500.

Editor: Katrina Bell
Editorial Committee: MacGregor Hall, Bryn Torkelson, Dan Sholian, Jim Titus, Dennis Munsey, Diane Bella, Chris Nelson, Karen Price